Report gives federal agencies poor grade for small business contracting

The federal government has not only not improved its track record in awarding jobs to small businesses over the last year, but its record is actually getting worse, according to a new report from Rep. Nydia Velázquez, D-N.Y.

In her third annual scorecard on small business contracting, Velázquez gave the federal government a D for its efforts to award jobs to small businesses in 2001. Ten out of 21 agencies received a D or D-, while two-the Defense and Education departments-flunked altogether. The government earned a C- in small business contracting from Velázquez in the previous two scorecards, with five agencies receiving a D or D minus for their efforts.

The Interior Department was the first and only agency to get an A on the scorecard released Wednesday.

"I would like to tell you that contracting opportunities for small businesses have dramatically improved, but nothing could be further from the truth," said Velázquez, who is the ranking member of the House Small Business Committee. "Our last two reports listed a 'failing five' among 21 federal agencies. This year, they have more than doubled to the 'dirty dozen,'" she said. Democrats on the House Small Business Committee compiled the scorecards.

The government's goal is to award 23 percent of contracts to small businesses; federal agencies awarded almost that number--22.81 percent--in 2001. Despite that achievement, the failure to fully meet the goal cost small businesses about $417 million in federal contracts, according to the report. Overall, the government awarded 2.5 percent of federal contracting dollars to women-owned businesses. The governmentwide goal for awarding jobs to women-owned businesses is 5 percent, meaning those businesses lost out on more than $5.5 billion in federal contracts, the report said.

Congress created a targeted program to assist female-owned small businesses in the 2000 Small Business Reauthorization Act. Under the law, agencies may restrict competition on certain contracts worth less than $3 million to women-owned small businesses.

Velázquez blamed contract bundling for denying small businesses billions of dollars in contracting opportunities in 2001. Contract bundling, approved by Congress in the 1994 Federal Acquisition and Streamlining Act, consolidates several contracts into one large one.

"Agencies are structuring contracts for their own convenience rather than for what is the best value for the taxpayer's dollar," she said. "The result is the government buys lower quality products in higher prices than what small businesses regularly provide."

But the government often uses contract bundling to get the best deal from contractors, according to Steven Kelman, a professor of public management at the Kennedy School of Government at Harvard University and former administrator of the Office of Federal Procurement Policy. "Contract bundling in many cases represents an effort by the government to use the fact that it is a large customer to get discounts and better service," Kelman said. "Anybody who goes food shopping knows that if you buy giant economy size, you are going to get a lower unit price than you would if you bought a single serving." Velázquez essentially wants the government to pay "retail instead of wholesale prices" for services, and "I don't think the taxpayer necessarily wants to see that," Kelman said.

The government spent about $219 billion on goods and services last year, making it the biggest buyer in the world.

Kelman said that while many small businesses might provide the government with a cheaper and higher quality product, federal agencies might also find the best deal with one large contract. "The 99 times out of 100 when the government gets a discount" results from bulk purchases, he said.

Dallas Evans, senior vice president of ISI Professional Services, a commercial real estate services company in Washington, said his company "routinely saves federal agencies millions of dollars." "Small firms like ISI are local to the job and have more invested in the community," Evans said. "We have less overhead and contain costs."

Some small businesses are having trouble getting a foot in the government door because the federal procurement process has improved, Kelman said. "The problem is that too many small businesses selling to the federal government basically developed a market niche by exploiting the dysfunctional procurement process," according to Kelman. The faster and less burdensome the process became, the more problems cropped up for small businesses, he said.

Last year, Velázquez introduced two bills aimed at helping small businesses in the federal procurement arena. The Small Business Contract Equity Act (H.R. 1324) would block federal agencies from offering consolidated contracts if they fail to meet their small business contracting goals. The Small Business Opportunity Enhancement Act (H.R. 2867) would designate the Office of Management and Budget as an arbiter in disputes involving federal consolidated contracts.

President Bush called for more open competition in contracting between small businesses and large corporations as part of his agenda for small businesses. Bush called on agencies to end unnecessary bundling of mega-contracts, and directed OMB to review the government's procurement practices to ensure they are committed to full and open competition.

The House Small Business Committee also held a hearing Wednesday on the Defense Department's efforts to involve more small businesses in the procurement process.